Tid: 23 mars 2015 kl 15.15-

Föredragshållare: Maren Schmeck, University of Cologne

Titel: Electricity price modeling with stochastic time change

Abstract Electricity prices from liberalized electricity markets exhibit characteristic features that are not observed in other commodity markets. Besides strong seasonalities, electricity exhibits large price spikes, which arise due to non-storability of electricity. The occurrence and severity of such spikes are related to power generating plant outages, but also depend strongly on the demand, which increases dramatically during periods of abnormally high or low temperatures. Moreover, price volatility is also related to demand, being higher during periods of high demand, leading to seasonal patterns in volatility. These features make electricity price modeling a challenging task. The powerful technique of stochastic time change allows to incorporate stochastic as well as deterministic (e.g., seasonal) features in stochastic process? volatility. By specifying the base process as a mean reverting jump diffusion and the time change as an absolutely continuous stochastic process with seasonal component, we are able to simultaneously model seasonal and stochastic effect in volatility and jump components of the electricity price. We use temperature time series as a proxy for the stochastic time change and show that this choice leads to realistic price paths. We discuss model calibration and its applications in Monte Carlo price simulations and risk management.

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